Any civilization that permits usury must continually create new money to remain stable. Since the industrial revolution, loans at interest have become an indispensable means of financing important infrastructure to greatly improve living standards. Yet there is a price pay for this practice: the economic busts that have plagued the 19th, 20th and 21st centuries are the bitter fruits of usury.
It is not a coincidence that the Bank of England, founded in 1694, arose before the industrial revolution got into full swing. Without it, economic busts would have destroyed finance and torn apart the embryonic industrial economy. Central banks enable our financial system to survive economic busts – devastating though they are. Ever since their founding, central banks have covertly created new money out of thin air and lent it to banks; sometimes a nominal store of gold (of far less value than the money issued) “backs it up”, other times money is simply created by legal fiat.
As time has gone by, central banks have been getting better at using newly printed money to stabilize the finance system. The 2008 recession was pretty bad, but it was nothing like the 1930’s. However, the policies which central banks currently deploy to stabilize finance are causing inequality to skyrocket.
Central banks don’t give out newly printed money. They lend it. All money was originally loaned into existence. If all loans were paid back, all money would disappear. To stop this, central and private banks constantly lend out new money so new loans can be used to repay old loans. Thus, the total amount of money loaned out exponentially increases, yet if this exponential is sufficiently gentle, it can, in principle, sustain a steady, moderate rate of inflation indefinitely.
Since the loaned out money can never be repaid without societal collapse, the exponential increase in loans, that the central bank supports, is really just a money printing operation.
Fiscal Policy and Skyrocketing Inequality
So who gets all this newly printed money?
The answer: People who can raise credit at low interest rates. The activity of continually printing new money inflates asset prices. If you can raise a loan with newly printed money at an interest rate below inflation and use it to purchase assets, then the value of your asset portfolio, purchased from money loaned to you out of thin air, will almost certainly go up – at least with inflation – leading to yearly capital gains that exceed the interest originally used to buy that capital.
Such people, using low interest loans to make capital gains, essentially receive newly printed money for free.
This effect is exponential: as the assets purchased with new loans appreciate at the inflation rate, our investor’s net worth will increase yearly roughly by the inflation rate minus any interest owed on his loans. This increase in net worth can serve as leverage for yet more loans which can purchase yet more assets whose value in turn appreciates.
The problem is that not everyone can access credit at interest rates below inflation. People who already have valuable assets can leverage up at very low interest (some brokerages charge less than 1% interest on money loaned out to buy stocks) but people with insecure jobs and no assets, cannot get 1% interest and usually pay over 10% on their loans.
This interest rate apartheid, between people whose net worth is positive and those whose net worth is negative, divides the population into 2 distinct groups: Those in the black who – if they are financially savvy – receive free newly printed money from central and private banks and those in the red (and less savvy ones in the black) who get no newly printed money.
The current policy of the world’s central banks is effectively to continually print new money and hand it out to rich people for free (through facilitating leverage to inflate financial assets). Theoretically this can put off another sudden, disastrous crash for quite some time (which is why, despite many cries of wolf, there has been no “next great recession”) – although a change in fiscal policy (such as Ending The Fed or raising interest rates) could cause a sudden catastrophic collapse. However, this strategy can only stave off collapse by continually increasing the relative share of the world that the wealthy own. So although central banks can stave off the next crash by handing free money out to rich people (assuming no revolution), since the super rich cannot own more than 100% of the world’s total wealth, this policy cannot continue forever.
Yet if we don’t continually release new money into the system – it will collapse!
Stabilizing Finance Without Increasing Inequality
The question is…if we are going to print money out of thin air, which we have to unless we intend to ban usury (and it’s a little late in the game to ban usury!)…who should we give this new money to?
The answer is simple: since no one has earned the newly printed money, everyone has an equal claim to it. Newly printed money should be divided evenly among the population.
How much money should be printed every year?
If we look at the formula for price:
MV = PT
Where
M = Money supply
V = Money Velocity
P = Price
and
T is the number of goods transacted
Then making P the subject of the formula yields:
P=(M/T)V
If we assume a real economic growth rate of 2%, a constant money velocity and an inflation target of 2%, then that would imply that the money supply should be increased by 4% per year. Taking the UK’s M2 money supply of 2.3 trillion as M would imply that, in order to achieve a target inflation rate of 2%, £92 billion pounds of new money should be distributed evenly throughout the population per year, which would give each U.K. adult £1,840 of newly printed money per year.
This is only a ballpark figure, and may be an overestimate, since the velocity of money in the hands of poorer people is faster than its velocity in the hands of the super rich, so the payment might be somewhat less. Furthermore, it would oscillate to correct for changes in the money velocity.
But the important point is that such a payment of newly printed money to everyone could simultaneously stabilize our financial system and prevent the super-rich from acquiring an ever larger share of the world’s wealth.
Growth and Inflation
You may have noticed that the amount of new money required to stabilize the system roughly equals the inflation target plus real economic growth.
Economists often say we need real economic growth to stop systemic collapse. This is not true. Nominal economic growth plus steady inflation, arising from new money, is adequate to stabilize the system. What is true is that real economic growth allows central banks to pass free money under the table to rich people without anyone else noticing. Our financial system is rigged to ensure the rich get the lion’s share of all newly created wealth but, since everyone ends up with more, no one complains too much.
Distributing an appropriate amount of newly-printed money to everyone would let capitalism exist in steady-state with modest inflation. Don’t believe anyone who says otherwise. It’s just the rich couldn’t get richer without genuine innovation that outperforms the market.
National Central Banks Should Hold All Deposits
At the moment, private banks create most (97%) new money. This must stop if central banks are to hand everyone new money. Otherwise the fractional reserve system would multiply the new money – perhaps 30 fold – and cause hyperinflation.
Stopping this is relatively straightforward. All that is needed is for central banks to hold all deposits. The national central bank would then manage all ATM machines and give everyone a central bank debit card for cash transactions. In other words, the central bank would provide personal banking services to everyone. Since the central bank can, in principle, print an infinite amount of currency out of thin air, there would be no fear of runs on the bank as it could always print enough cash to pay depositors.
The central bank would then loan money to private banks at low interest who would then loan the money out to people and firms at a higher interest rate – the spread in interest being the private banks’ source of profit.
In our current system, when private banks lend out money, they credit the money to a deposit account held in the same private bank which can then be used as collateral for yet more loans, leading to uncontrolled money creation.
In the system I propose, when private banks lend money out to customers, they credit the customers’ central bank deposits. This enables the central bank to tightly control the amount of new money and credit created. And every personal account held by the central bank would, from time to time, be credited with basic income that roughly annualizes to £1,840 – more if the economy grew faster than 2% per annum.
Financial crises happen when too many borrowers fail to pay back their loans and cause depositors to lose their money. If these depositors either have loans themselves, or pay wages to people with loans, then this loss of deposits causes more debt defaults which wipe out yet more deposits…and on…and on… and on, in a disastrous cascade.
Securely protecting deposits could make financial contagion and crises a thing of the past. And if the central bank held all deposits, they would be fully protected, as any entity that can infinitely print money can pay all depositors in cash – even simultaneously. Thus, if the central bank held all deposits, there would be no more financial crises.
If the central bank held all deposits, no private bank would be too big to fail. There would be no difference between a large bank and large car company going bust.
A central bank holding all deposits is consistent with the libertarian ideal of the nightwatchmen state that solely protects private property. After all, your deposit account is your property, so should the state not protect it from irresponsible lending institutions?
It would be fairly simple to transition to this system without an economic collapse. The central bank could offer depositors convenient personal banking services along with a central bank debit card (an perhaps a sign up bonus). Then, whenever someone transfers a deposit out of a private bank and into the central bank, the central bank would lend the private bank a sum exactly equal to the deposit that was transferred out. This way, the central bank could transition to holding all private deposits without drying up the supply of loans.
Simple!
The recent announcement by the Chinese central bank that they will launch a digital currency may be the first step to a future where individuals and businesses can access the affordability and convenience of a current account without running the risk that the private bank holding the account might go bankrupt. If China can properly implement such a system, it will make its economy completely immune to recession. If the rest of the world’s central banks fail to catch up, digitize their currencies and recession-proof their economies, then, in the wake of the next recession, we may all end up using Chinese digital Yuan.
A Land-Backed Currency
Without gold, what is the real basis of a currency’s value? A currency backed by genuine value inspires more confidence than one whose value floats on thin air and good will, yet backing up a currency with real value is a straightforward matter and can be accomplished with the stroke of a pen.
A tax on the site rent of all the nation’s land, payable only in national currency would – at the stroke of a pen – create a land-backed currency. Such a land value tax would effectively use the total asset value of the nation’s territory to back its currency.
Since:
- Total global land value far exceeds total global gold value
- Land cannot be covertly stolen
- Land is the natural asset of every nation
- Land is of far greater use than gold
It is far more sensible back up a currency’s value with land rather than gold.
By adopting all of these measures, we can end the devastation that financial instability causes once and for all and transition to a stable, secure and prosperous future!
John
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